What Are the Tax Implications of an Illinois Divorce?

 Posted on December 03,2024 in Divorce

Since most divorces are complex in one way or another, the last thing you may want to think about is taxes. Unfortunately, like other subjects you would prefer not to think about, settlement negotiations must factor in the tax implications and how your divorce could alter your tax situation.

As if tax issues were not enough, divorced individuals tend to have a higher rate of tax audits. This is because forensic accountants often expose hidden assets and undisclosed income during a divorce. Following a divorce, the IRS has three years to audit your marital finances, although this time period can be extended to six years if there are discrepancies over 25 percent or fraud seems likely.  

Before you panic, however, if the IRS is auditing you because of something your spouse did that you were unaware of, you can apply for "innocent spouse relief" by asking the IRS to assign the fault to the "right" spouse. When you have an experienced Yorkville, IL divorce attorney from The Law Office of Matthew M. Williams, P.C., you can be sure all potential tax implications are factored into your final divorce settlement.

How Does Divorce Affect Your Tax Filing Status?

Perhaps the most noticeable change you will see in your taxes following divorce will be the lack of married tax benefits when you file as "single." Your filing status will be determined by your marital status as of December 31st. If you are divorced on that date, you will file as "single."

If your divorce is not completed by that date, you can choose to file as "married" or "married filing separately." If you and your spouse have not lived together for at least six months and you have been the primary residential parent for at least six months, you may be able to file as "head of household," which comes with some significant tax breaks.

Are Child Support and Spousal Support Taxed?

As of December 31, 2018, the spouse receiving spousal support does not have to report that money as income. Conversely, the spouse paying the support may not deduct the spousal support. Child support is the same; the receiving spouse is not required to claim child support as income, and the paying spouse may not use child support as a deduction.

Which Parent Can Claim the Child as a Dependent Following the Divorce?

The divorce decree probably contains specific language regarding which parent can claim the child as a dependent. In some cases, parents alternate from one year to the next, while in others, one parent – often the primary residential parent - may be allowed to take this deduction every year.

Does Asset Division During Divorce Have Tax Implications?

Illinois is an equitable division state, meaning marital assets are divided fairly, but not necessarily 50/50 as they are in community property states. Usually, the division of property or cash during a divorce is not further taxed, federally or from Illinois. When an asset or business is sold during or after the divorce, there could potentially be tax implications for each spouse relative to the portion owned.

Are Retirement Accounts Taxed?

While the division of a retirement account does not trigger taxes, what each spouse does with his or her portion of the retirement account proceeds can affect taxes. When the money is rolled over into an IRA, 401(k), or 403(b) account, it remains tax-free. If the money is withdrawn, it will be subject to taxes, fees, and penalties.

Contact a Kendall County, IL Divorce Lawyer

It is important that you address tax considerations early in the divorce process. This helps you avoid any unpleasant surprises. An Oswego, IL divorce attorney from The Law Office of Matthew M. Williams, P.C. can offer guidance in this area to help ensure any agreements made are fair to you.  Attorney Matthew M. Williams focuses his family law practice on mediation and collaborative divorce. This allows you to reduce costs while making the process easier and more amicable.